Only a real recovery will boost GCC investor confidence

It is remarkable how many politicians and business leaders have come to the same conclusion: confidence must be restored before an economic recovery can take place.

This insight seems to hit them like a bolt-from-the-blue. However, you do not treat a cold by muffling the symptoms or talking optimistically to the victim. Once the cold is over then he or she will feel better, and happier with life.

Let us examine the reasons why investors have lost their confidence. It has something to do with an unprecedented global financial crisis, massive falls in real estate and stock market valuations, and latterly the slump in global trade and GDP. Correct that lot and confidence will recover.

Over-confident

Those trying to talk up confidence against this background are surely heading for a fall. Once their words of solace are proven unwarranted then people will loose even more confidence, setting back a recovery even further.

It was the same story in 1930 after the Wall Street Crash of 1929. President Herbert Hoover called an end to the downturn in many speeches that year and ended up losing all his credibility. The Harvard Economic Society made similar proclamations and was later completely wound up.

So can we really place any credence on those who say that the worst of the recession is over, or are reported as saying as much?

Former Fed chairman Paul Volcker, who is leading President Obama’s economic team, said: ‘None of us has seen a decline in economic activity at the rate of speed seen late last year’, and noted that while this may not have left the US in a Great Depression it has resulted ‘in a Great Recession for sure’.

The hope is that the worst is behind us with the great contraction of economic activity from de-leveraging – the rapid unwinding of massive borrowings – now done. But a slowing in the rate of decline is not a recovery, even if the worst of the decline is over.

Long slog

For a recovery to happen GDP and trade needs to stop falling and actually rise. Mr. Volcker warns that the US faces a ‘long slog’ towards recovery.

For the Middle East Deutsche Bank CEO and highly respected economist Dr. Henry Azzam says recovery is entirely dependent on a global upturn, and that there is a risk of lower oil prices if the recession is prolonged.

That would unfortunately result in a further ratcheting down of local economies which only felt the force of the global economic crisis last autumn. Renewed investor confidence will only follow a recovery, and the ride downwards does not appear over yet, even if the rate-of-decent has slowed down.